In the late 1970s and early 1980s it was not unusual for mortgage interest rates to exceed 12%. As a consequence, many purchasers were unable to obtain traditional financing for residential units, forcing sellers to offer various alternative and creative financing arrangements if they wanted a realistic chance of selling their homes. One of the most common tools in this regard was the “installment contract”, also known as a “contract for deed” or “articles of agreement” (hereinafter “installment contract”).
In a typical installment contract, the purchaser and seller agree upon a sale price for a condominium unit which may or may not involve a down payment. The purchaser is granted possession immediately and is required to make monthly payments to the seller for between one to three years. At the end of this period, the purchaser will have to pay the balance of the purchase price after receiving a credit for payments previously made. If the purchaser is unable to obtain financing, or is otherwise unable to raise the required balance, a default is declared, the purchaser is evicted and the seller is entitled to keep all payments received.
Historically, the advantage to the installment contract was that, during the term of the contract, the purchaser was not captive to the prevailing interest rates. Additionally, a purchaser with a poor credit rating who could not obtain traditional financing might find a suitably desperate seller willing to extend credit. All parties hoped that, at the end of the contract term, the purchaser would be successful in obtaining financing and pay the seller the agreed-upon contract price. Once interest rates dropped and credit was extended to virtually everyone, however, the necessity for the installment contract waned and its use was seen as sporadic at best.
Times have changed again. The current climate in residential-housing financing is such that, unless the purchaser has a high credit score and a large down-payment, financing may very well be refused or, at least, significantly more expensive than what has been available. Accordingly, it is likely that sellers, once again, will utilize installment contracts as a tool to facilitate interim financing of their property.
One of the issues that will be facing the Board of the community association is the status of the purchaser under an installment contract. Specifically, can this person be counted toward a quorum, cast a vote or run for the Board? With respect to condominiums, the answer is found in the Condominium Property Act, Section 18(b)(11) which provides in pertinent part:
That in the event of any resale of a condominium unit, the purchaser of a unit from a seller other than the developer pursuant to an installment contract for purchase, shall during such times as he or she resides in the unit be counted toward a quorum for purposes of election of members of the board of managers… shall have the right to vote for the election of members of the board of managers and to be elected to and serve on the board of managers unless the seller expressly retains in writing any or all of such rights. In no event may the seller and purchaser both be counted toward a quorum, be permitted to vote for a particular office or be elected and serve on the board. Satisfactory evidence of the installment contract shall be made available to the association…
It is important to note that the rights of a purchaser pursuant to an installment contract set forth above do not apply if the seller was the developer, if the purchaser does not reside in the unit, such as when it is being leased or if the seller expressly retains rights set forth above. Finally, the Board has the right to demand a copy of the installment contract. As these documents are typically recorded with the County Recorder of Deeds, it is recommended that a recorded copy be provided the Board as a further demonstration of authenticity.
Caution should be exercised by the Board under certain circumstances. Many associations are amending their declarations to prohibit, or severely restrict, the ability of unit owners to lease their respective units. Unscrupulous unit owners have been known to utilize the installment contract as a tool to circumvent these restrictions. For instance, if the installment contract provides for the purchase of the unit at an unreasonably high price, and further provides that the purchaser is relieved of any obligation to purchase in the event he/she is unable to obtain financing at the end of the term, the seller has, for all practical purposes, leased his unit. Any such installment contract, then, should be scrutinized to determine if it is a legitimate attempt to sell a residence or merely a vehicle to circumvent an otherwise legitimate leasing restriction amendment. If there is any question as to this issue, the Association’s attorney should become involved.
With a better understanding of the basic workings of installment contracts, community association Boards will be in a better position to address the various issues in a smooth and expedited fashion.
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